Data Modeling of Financial Derivatives: A Conceptual Approach

Modeling Futures Contracts

When it is not in our power to follow what is true, we ought to follow what is most probable.

—René Descartes, Le Discours de la Méthode

Most of the modeling principles we learned in the last chapter are applicable to the subject of this chapter: futures contracts (aka futures). Futures share many features with forward contracts, but a fundamental difference between them is how each one approaches the risk factor. Forward contracts are risky, with the shadow of a default always looming. Futures contracts, on the other hand, are deemed to be less risky because they are traded on exchanges. Exchange-imposed rules buffer ...